Saturday, July 28, 2007

Game-o-Nomics

I've had a couple of game store employees so far, and the first thing they do when they see their first product invoice is begin adding up the math. "Wow," they say, "you got that $50 board game for only $25. When you sell that one are you going out to dinner?" That's a slight exaggeration, but it says they don't understand the economics of the situation. The same could be said for customers that demand discounts or expect me to compete with online retailers.

The bottom line is that a game store can expect their profit to be around the rate of sales tax. Let's figure 7%. So that $50 board game, if everything is in balance, will net the store owner about $3.50. So nobody's going out to dinner, but a cup of coffee isn't out of the question. If I had given that customer a 10% discount, you can subtract $.70 from that amount and it gets worse from there.

The average game store nation wide does about $200,000 a year in sales. Sounds pretty good if you look at your salary, right? Now multiply that by 7%. That's $14,000 a year. Don't quit your day job just yet. So where did that $186,000 go? Is the owner expensing his Lamborghini? And what about the tax they're always charging me?

Sales tax is at best a short, no interest loan to the store owner. They collect it and don't have to pay it to the state for 3-4 weeks. At worse, sales tax is a burden fraught with perils. You've got to collect it, track it, fill out forms, send in a check and if you're late, oh man. The State of California just passed a law that penalizes a late payment by 50%. Imagine your credit card company doing that to you. Oh yeah, and don't be wrong or that's another penalty.

Now lets look at the anatomy of that $50 board game purchase (ignoring the sales tax):

$25 goes to buy another game to replace it. Many board game companies like Days of Wonder, GMT and Fantasy Flight Games have slashed their discount, so that game might cost $26-27.50. Who makes up for that $1-2.50? Hmm. See profit below.$9 goes to pay the guy who sold it. Most game store employees make around minimum wage. We pay about $9/hour, which in California is close to minimum wage. In San Francisco, which wants to run itself like its own country, minimum wage is legally $9.14. If the store was there, they would also regulate which toys I could sell based on their composition.$6 goes to pay the rent. They say (they being smart game store owners in the Mid-West) that rent should be about 12-13% of your gross sales. My California rent is actually about $7.50 in this equation, which hurts my profits. We're going to fix that soon.$2.50 goes to profit. Don't forget taxes (make that $2.50 a free and clear $1.65).$2 goes to pay utilities in the store. Electricity prices continue to rise and they're higher than residential prices.$2 goes to merchandising, office supplies and misc. Making displays, buying labels and register tape, printer paper, etc. They add up.$1.5 goes for advertising so people know the store exists. This can be as high as $2 for some stores. It's a percentage based on gross sales (around 3-4% recommended).$1 goes to credit card processing fees. If you used your Visa or Mastercard. It's $2 if you used an Amex or Discover. Who do you think pays for all those rewards? That would be me.$1 for insurance. This covers the store and workers comp insurance for the employees.$1 shrinkage and shelf wear. Our board game didn't get stolen and it didn't get damaged sitting around, so you can represent this as a savings account for such items. On average, a store will pay 1-2% of their gross for items that walk away or get damaged. Our number is lower (figure that number goes to subsidize rent on our small store).

So why do it?Love of games will take you so far. This kind of math is what many self-employed people put up with for their independence and happiness. I make about a third of what I made in my previous career with 50% more hours, but I enjoy going to work in the morning. My labor is my own. I think games drive people to own their own store but the rewards of self-employment keep them there.

3 comments:

Another way to look at it. If the store wants that board game, $27.50 is spent on it. When it sells for $50, the store makes $22.50, that is, until the store reorders it for another $27.50. After reordering it, the store is still on the hole for $5. It isn't until the board game sells the 2nd time (and is restocked) that the store actually makes money and only $17.50 at that.

If the game store gave a flat 10% discount ($5 off), then the store only makes $7.50 after selling it twice. Not enough to pay one our of minimum wage!

I've come to the conclusion that the most important area of managing inventory is knowing what to buy and when to stop buying it. If you can master these techniques, you don't even have to be a good sales person. In other words, money is made in the buying, not selling.